Affordability Criteria Changes

In the past customers looking to take out a new mortgage would use their income as the main assessment of how much they could borrow. Today, lenders may still use their salary as a way of measuring loan sizes but may also put a lot more emphasis on mortgage affordability before they will give their approval.

The salary/salaries of those applying for mortgages are still a very important part of the approval process, however lenders will all have their own criteria on how much an individual or couple can borrow based on their income(s). The criteria used here, however, have changed in recent times.

Before the credit crunch some lenders relaxed their rules on how much a borrower might qualify to be given in a mortgage. The industry tended to offer an average of around 3.5/5 times salary but some would offer much higher sums without checking in detail whether the borrower could actually afford their mortgage repayment, even allowing a borrower to self cert their income in some circumstances.

Due to the current economic crisis many have now reverted back to average salary/borrowing criteria and many now will focus more on mortgage affordability. Lenders may want to dig a little deeper to see how much borrowers can actually afford to repay before telling them how much they can now borrow.

Lenders will still want potential mortgage borrowers to state their salaries but they will also be interested in how this money is spent. This may involve listing income and outgoings which the lender will then look at to assess whether the applicant can actually afford the repayments of their new loan based on available income once all existing financial repayments have been taken out. Those with fewer debts or commitments may show that they have more disposable income to make a mortgage payment. They may then be permitted to borrow more based on their disposable income.

Those that spend a lot of their monthly income on repaying other debts may not find it so easy to borrow at all. If, for example, an applicant has a high debt to income ratio then they may not actually be able to borrow as much as they would like, even if their salary is technically at a level that should allow them to do so.

A Lender will also look into the credit history of a mortgage applicant during the approval process. Those with a good credit score are more likely to be approved and to get the best deals. Those with a bad credit record may be turned down for the loan or may be charged higher rates. The type of property to be purchased may also play a part in allowed borrowings as some types of buildings may have lender imposed mortgage limits.

As a guide most lenders will consider multiples of up to 4.5 for your gross income, however, this is subject to the application passing the Lender’s affordability and credit criteria.

To avoid disappointment please get your broker to calculate your affordability prior to submitting a mortgage application.

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